COSTS!

By Gary Kaltbaum- March 17, 2018
We just wanted to alert you to some very important facts. Not opinion…facts! These numbers must be watched as very important costs continue to go up. Cost of energy, cost of borrowing, cost of doing business. All evidence in is that the economy remains in decent shape. After all, markets just held longer term support. (The market is a pretty darn good forecaster.) We just know there continues to be massive debt and deficits (a long term headwind) and not sure the following numbers do not start to affect things shorter term. The good news is that even with these numbers, a bunch of RETAIL names broke out of range yesterday. We doubt the economy gets in trouble when that type of action occurs.

The following are yields from the short to the long term. The 1st number was at the start of the year. The 2nd number is from yesterday. That’s a darn big move in just a few months. Savers are finally doing better but loans, mortgages and cost of capital are all going up. It is not an accident that the most interest rate-sensitive areas (housing, utilities, real estate) are some of the weakest areas in the market.
 3-Mo: 1.39% –> 1.92%

6-Mo: 1.53% –> 2.09%

1-Yr: 1.76% –> 2.32%

2-Yr: 1.89% –> 2.58%

5-Yr: 2.20% –> 2.76%

10-Yr: 2.40% –> 3.09%

30-Yr: 2.74% –> 3.21%

And oil prices. One year ago, the average price at the pump for regular was $2.336. Today, it is $2.902…and counting as we expect another bump in the next week or two. Estimates are that every 10 cents at the pump over a year’s time takes $10 billion out of the consumer’s pocket. You can add up and multiply the numbers yourself. That’s a lot of cake that would otherwise go towards anything but gas. Keep in mind, this does not include the cost to business and businesses that use oil in their manufacturing process. (Many!) And again, by no coincidence, 2 of the worst areas in the market right now are airlines and cruise lines.

PRE MARKET

Futures down modestly on the S&P but down decently on the NDX. CSCO not helping.

NTES whacked. Others to the downside are PLCE, ACXM, TTWO, JACK. On the upside are BZUN, DDS, WMT, MLNX, WWE.

Yesterday was about RETAIL as a few names moving out of range. NKE, M, URBN,come to mind but also good action in ANF, BBY, COST, GOOS, LULU and others. This is happening while rates go higher and oil prices soar. In fact, now above $72. Yields are above 3.1% on the 10 year. Rates have been moving higher all year. Keep in mind every 10 cents move at the pump over a year’s time is $10 billion out of the pocket of the consumer. The national average gas price is now $2.88.

And to give you an idea where rates were starting the year and where they are now…finally, some relief to the saver but higher costs on loans, mortgages and everything else.

3-Mo: 1.39% –> 1.92%

6-Mo: 1.53% –> 2.09%

1-Yr: 1.76% –> 2.32%

2-Yr: 1.89% –> 2.58%

5-Yr: 2.20% –> 2.76%

10-Yr: 2.40% –> 3.09%

30-Yr: 2.74% –> 3.21%

PRE MARKET

Pullback yesterday…no biggie. The thought process coming in was market was tired off of the move off of the lows at longer term support.

We suspect we are going to continue be range-bound…but range-bound is not bad. It elongates bases. It isolates strength.

Of note:

10 year shot through 3% and now at multi-year high. The 3 month treasury is now yielding more than the S&P dividend.

Interest rate-sensitive areas remain bearish. HOUSING hit another relative low yesterday with UTILITIES and REITS remaining in bad shape.

OIL PRICES  remain strong but remain extended. We suspect that sooner rather than later we get a decent pullback. Extended and overbought.

The DOLLAR remains very strong. Good time to fly internationally. This will affect our multinationals…and is affecting GOLD and GOLD stocks. We have not been bullish on this area like others and now, looks like a decent top in place.

PRE MARKET

Over the weekend we said markets were stretched, extended and overbought in the near term. On radio yesterday, we said market felt ready for pullback. Not because anything is bad. It just felt tired along with the overbought conditions along with the action yesterday. Of course, that doesnt mean markets have to pull back. Overbought can get more overbought. That said, nice gap to the downside this morning. Blame is on 10 year yield back above 3% this morning as the dollar rallies against other currencies. A strong dollar hurts our multinationals.

As we also said in the weekend report, the biggest issues for us were oil prices, debt, deficits. We were not as worried about interest rates because central banks are still easy. Oil prices continue higher this morning and to be clear, while we do not believe interest rates being over 3% is a big deal, we would rather see rates NOT go up.

With major indices sticking up from the recent move off of longer term support, we actually welcome a pullback…as long as it is controlled and rotational. (Our guess)

HD has been rallying into earnings. About an hour ago, was down $6 but as we write this, only down $1 and change. Sales did decelerate a bit.

WEEKEND NOTES

Last weekend, we wrote to you about two important days that led us to believe another good low was in but this time a move off the lows could be better than the last time. We simply saw the market have another strong reversal day on Thursday May 3rd followed by a strong day on Friday May 4th. This all occurred in and around longer term support telling us it was important. But this past week’s move surpassed even what we thought as major indices broke above not only short-term resistance but many of the majors moved above the highs of mid-April.

Markets are short-term stretched, extended and overbought but that in no way means they have to pull back. Big money is big money and momentum is momentum and we never argue with it. If markets decide to pull back, at this point we expect it to be controlled and rotational with no chance of revisiting the lows at this juncture.  The move last week was that good.

We want to add one area that has been dead may have been woken up, that being HEALTHCARE and BIOTECH as words out of the president were not as harsh as expected on the industry. OILS/ENERGY remain the strongest area but are very extended.

We don’t usually write about what is driving prices higher. We mostly care about price but we do have some thoughts.

EARNINGS have been very strong. We do believe it cannot get much better but strong is strong.

PEACE is meaningful. Regardless of what you think of the President, this North Korea stuff is important and meaningful, especially to that area of the world. It is always bullish when a president can show strength that leads to good things. Of course, the jury is till out on the outcome but all evidence in so far is that this is for real.

We have not been worried about INTEREST RATES like others have. Rates remain very low. The fed remains very easy. Yes, 1.5% is easy and if you don’t think that is easy, both Europe and Japan are still negative and are still printing money…and frankly, we think they will be that way infinitum as they believe they are heroes.

“WE’RE RAISING TAXES WHEN WE WIN!” Yup, socialist Pelosi said that about the mid-term elections. We suspect they are reading their own polls incorrectly as this is a losing proposition. There is no way the Dems get the senate as they have 26 up for grabs while the other side only has only 9 but we are told the house is up for grabs. Just keep telling the country that taxes will go back up, companies would lose the benefit of the cuts and potentially stop all the good things with bonuses, investments, raises, lowering of utility rates and a bunch of other stuff…and watch the house stay with the other side. We suspect Madam Pelosi just does not get it and refuses to try.

What could derail further market gains?

OIL PRICES. It is said every 10 cents hike in gas prices for  year takes $10 billion out of the hands of the consumer. That’s a lot of cake. Let’s just say prices at the pump are up a lot more than 10 cents.

MUELLER. Need we say more. Quite the wild card. Will this man have the grapefruits to announce something close to the election?

THE DEBT BOMB. We won’t bore you with the numbers in this report but we will not stop trying to help change the trajectory of something that is unsustainable. Just think Kilauea when the deficit decides to shoot the middle finger back at all the politicians that had a hand in creating this blob. Unfortunately, they will all probably be gone at that time either lobbying or  working for companies that donated to them (paid them off) throughout the years.